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AOL Time Warner to Restate 2 Years

UPDATE: AOL-TW plans to restate income, including $190 million from a two-year period as part of its internal accounting probe. AOL division's 3Q results weigh on overall earnings but company hits expectations. Special Report: Has AOL Hit Bottom?

AOL Time Warner said it would restate financial results for eight prior quarters as part of an internal probe of accounting practices from AOL’s dot-com heyday during the late 1990s and early 2000.

The decision will result in a reduction of $190 million in revenues and $97 million less in cash earnings.

The restatement news was part of its solid third quarter earnings results released Wednesday that showed total revenue at $9.98 billion, up 6 percent from the same, year-ago time period when it took in $9.06 billion.

Net income was $57 million, or 1 cent per share, compared to a net loss of $997 million, or 22 cents per share during the same, year-ago quarter.

Subscription revenues for all the AOL Time Warner properties were up by 13 percent to $4.8 billion. Advertising and Commerce revenues fell by 12 percent to $1.7 billion, led by the weakness in online advertising, the company said, as well as difficult comparisons to last year as a result of the closure of the Warner Bros. Studio Stores.

Not counting the restatement news, the earnings generally met or exceeded analysts’ expectations.

No Surprise: AOL Weakest of Company Divisions

AOL’s revenue was $2.2 billion, down about 7 percent from the same time last year when it took in about $2.3 billion. Wayne Pace, the chief financial officer of AOL Time Warner, said 15 percent growth in subscription revenue to $1.8 billion helped offset losses in online ad revenue, which was driven in part by strong subscriber growth in some European markets.

Advertising and content revenue for AOL fell by 48 percent to $321 million from $612 million during the prior year’s quarter.

Content and other revenues fell by 63 percent to $67 million from $180 million, which was affected by termination of the company’s iPlanet commerce agreement with Sun Microsystems.

The growth in US subscribers during the quarter slowed to 129,000, bringing the US subscriber base to about 26.7 million. Pace said the lower growth in US subscribers reflects not only a maturing market for narrowband, or dial-up service, but also the company’s focus on making each subscriber more profitable rather than signing up users with free trials.

Among its domestic base, 21.7 million (82 percent) are paying a monthly rate of $23.90 for unlimited access, or higher pricing plan. Another 2.9 million are on free trials, and 3.6 million, or 13 percent, are using bring-your-own-access plans. Another 5 percent are using bundled plans with other providers.

Although the ISP has managed to cut its losses, its cash earnings have fallen by 30 percent due to a decline in high margin advertising revenue and an increase in marketing costs, Pace said.

For the full year, Pace expects AOL to close out the year with $1.6 billion in advertising commerce revenue and cash earnings of $1.7 billion.

During a conference call Wednesday evening to discuss results, company official said they were planning more detailed discussions about the AOL unit at an analyst meeting scheduled for Dec. 3rd.

The AOL results stood in contrast to other media units across the company, which brought in solid results. The film division was the strongest performer with $2.6 billion in revenue, up 25 percent, helped by a hot market for DVD sales and rentals; sales in the cable division grew by 11 percent to $1.7 billion; networks revenue was up 10 percent to $1.8 billion; the music division up 10 percent to $96 million and publishing revenue was up by 11 percent to 1.3 billion.

Richard Parsons, AOL Time Warner’s chief executive officer, said he was pleased that overall results were in line with expectations. “Our operating results reflected the continued collective strength of our traditional media and entertainment businesses, offset by the declining trend in advertising at America Online. As we move forward, we will stay focused on growing our businesses, putting the right plan in place for America Online, and continuing our progress toward achieving our other top priorities.”

The Last of the Restatements

Parsons said even though the restatement of about two years’ worth of results represents a small portion of America Online’s total revenues during the period, “we have taken, and do take, this matter very seriously. We have devoted a significant amount of time and resources to our review and, based on the substantial work we have done to date, do not expect any further restatements from it.”

He said the restatement would not affect the company’s committed liquidity, which includes over $8 billion of cash and unused bank facilities.

The restatement of past quarters represents about 1 percent of AOL’s total revenues for that same two-year period, about 3.4 percent of its advertising and commerce revenues and close to 2 percent of its cash earnings.

AOL Time Warner said the adjustments would reduce its overall advertising and commerce revenues by $190 million over eight quarterly periods starting with the third quarter of 2000.

For the America Online division, the impact will be to reduce advertising and commerce revenues by $168 million over those eight quarterly periods, with a corresponding reduction in EBITDA (earnings before interest, taxes, depreciation and amortization) for that same time period of $97 million.

The remaining $22 million in the restatement comes from transactions related to the America Online division that were delivered by other AOL Time Warner divisions, the company said.

AOL Time Warner said the largest impact of the adjustments is in the quarter ended September 30, 2000, for which advertising and commerce revenues will be reduced by $66 million and EBITDA will be reduced by $30 million.

Probes by the Securities and Exchange Commission as well as the Department of Justice over how it booked advertising and commerce revenue during the late 1990s and early 2000 are also ongoing.

The company has filed restated financial statements for the affected periods with the SEC. Although its internal review is still ongoing, the company said it did not expect any more restatements in connection with its own review.

The company said it expects overall revenue growth of between 5 percent and 8 percent for the year. Cash earnings are expected to grow by between 5 percent and 9 percent.